Euro Falls as Lack of Inflation Looms Before ECB Policy Meeting

Euro Falls Ahead of ECB Meeting
  • Shared currency drops first time in three days versus dollar
  • ABN Amro sees 40% chance central bank will add to easing

The euro fell for the first time in three days amid sagging inflation expectations and speculation the European Central Bank will hint at further monetary stimulus when it meets Thursday.

The 19-nation currency gave back some of last month’s advance after an index released Wednesday showed producer prices slumping for a second-straight month in July. Since then, China’s devaluation and a renewed decline in oil have only damped the inflation outlook further, threatening ECB President Mario Draghi’s 2 percent target, as well as growth in the region.

“The ECB will be keen to prevent any re-appreciation of the euro by really refocusing its communications on the downside risk that it sees to growth and inflation,” said Ian Gordon, a foreign-exchange strategist at Bank of America Corp. in New York. “Given the risks around the inflation outlook still clearly remain on the downside, we do see them actually conducting quantitative easing beyond September 2016.”

The euro slid 0.8 percent to $1.1227 as of 5 p.m. in New York, declining versus most of its 16 major peers. The shared currency weakened 0.8 percent versus the pound.

Inflation Outlook

Europe’s currency has been one of the biggest gainers of the past month as a wave of risk aversion swept from China to markets around the world, prompting investors to unwind bets on euro declines, and instead seek refuge in the currency.

That may be about to change. As stocks and riskier assets rebound, traders are refocusing on the economic fundamentals of the region, and how the ECB might respond.

“We think ECB President Draghi will step up the dovish rhetoric, opening the door for future action,” ABN Amro Bank NV analysts led by Nick Kounis, head of macro and financial markets research, wrote in a note. “The chances of additional monetary easing already at this week’s meeting is significant, at around 40 percent.”

The five-year, five-year forward inflation swap rate, one of the central bank’s favored gauges of inflation sentiment, slumped to its lowest since March last week. The ECB will release revised inflation and growth projections on Thursday.

Draghi acknowledged the affect of the oil price on inflation at his previous meeting when crude traded at about $57 a barrel in London. The price has slipped to about $50 a barrel.

Executive Board member Peter Praet said Aug. 26 that policy makers are ready to expand or extend bond purchases if their inflation goals are derailed by the decline in commodity prices and risks to global economic growth.

“The global environment right now is deflationary,” said Mark McCormick, a foreign-exchange strategist at Credit Agricole SA in New York. “I don’t think the ECB’s going to react aggressively by adding to its policy, but the focus is definitely going to be on talking down the euro. That’s the key policy measure they can use to try to boost inflation expectations.”

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